The central bankers' central bank: a new banking crisis?

But should the BIS be listened to at all?

The Bank for International Settlements – the Swiss-based multinational institution which is known as "the central bankers' central bank" – has issued its 83rd annual report, which warns of the potentially massive implications of a spike in bond yields.

BIS argues that an increase in average yields of 300 basis points – 3 percentage points – would lead to losses on US Treasury bills of over $1trn, and it warns that such a big move can happen "relatively fast":

Someone must ultimately hold the interest rate risk. As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care.

The warning fits into a narrative which began last week: that the US Federal Reserve's decision to "taper" its quantitative easing program will end the period of artificially low bond yields. There has certainly been a spike in yields: a 10-year UK gilt yields 2.48 per cent, compared to 1.90 a month ago, while 10-year US is up to 2.58 per cent from 2.01.

But the BIS has its scope set wider. The rises we've seen this month are merely the difference between "low" and "very low" cost of debt for solvent sovereigns; it doesn't yet change the overall story of the last thirty years, which is continued decline in yields.

Instead, as the Economist's Ryan Avent writes, to understand BIS's advice, we have to remember its background as an institution where the central bankers go to tell each other the myths on which their self-esteem rests. And key amongst those myths is the argument that interest rates – the key driver of monetary policy in most open economies – have been too low in recent years.

If interest rates have been too low, then bond yields are doubly depressed, first by QE and second by the low rates. It's easy to see how that belief spirals into warning of an inevitable spike in yields.

But, Avent points out, rates aren't low (or rather, too low) when they are low in absolute terms. Instead, we have to look at where they are compared to where they should be to encourage full employment. Given the deeply depressed economies in the developed world, it is almost certainly the case that interest rates at the level the Bank of England's 0.5 per cent are too high: that, rather than running the risk of causing the economy to overheat, they are dampening investment and growth.

There's a similar infestation of central-bank-ese in the BIS's treatment of sovereign debt, which Avent summarises as "Something something fiscal policy":

Central bankers have strong views on what governments ought to be doing with their budgets, many of which make most sense when given the least scrutiny. The BIS knows what it wants to say: that fiscal consolidation is almost universally necessary and the only real question is how to pursue it. Picking a path toward this argument that doesn't immediately cave in under the weight of self-contradiction proves to be a difficult task.

Paul Krugman is even harsher, writing that:

Part of what makes the report so awesome is the way that it trots out every discredited argument for austerity, with not a hint of acknowledgement that these arguments have been researched and refuted at length.

The BIS pulls the classic two-step of looking at problems from within the Eurozone – where sovereigns without central banks have seen massive explosions in debt and borrowing costs – and extrapolating that to non-Eurozone nations. In short, it's not moved on from the economic "debate" which occurred in the spring of 2010, over whether Britain was the next Greece. (In case you've missed this one: it's not.) But even within the Eurozone, the BIS analysis is problematic, demanding massive deleveraging in countries which are already struggling to cut what spending they can. It fails to acknowledge the first rule of Eurozone budgets: if you are trying to cut debt/GDP ratios, it's more important in the current economic climate to keep growth up than it is to cut government spending.

BIS goes one step still, though. It calls for mass private sector deleveraging at the same time, inveighing against general balance sheet overhang. Quite apart from the fact that it's tricky for all sectors of the economy to deleverage at the same time – someone has to buy the debt – there's that whole paradox of thrift thing which we've known about for a little over three hundred years.

"If the world is lucky," writes Avent, "central bankers will discount the recommendations of the BIS." If the world was lucky, there'd have been better recommendations in the first place.

A woman cycles past the Bank for International Settlements in Basel, Switzerland.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Theresa May gambles that the EU will blink first

In her Brexit speech, the Prime Minister raised the stakes by declaring that "no deal for Britain is better than a bad deal for Britain". 

It was at Lancaster House in 1988 that Margaret Thatcher delivered a speech heralding British membership of the single market. Twenty eight years later, at the same venue, Theresa May confirmed the UK’s retreat.

As had been clear ever since her Brexit speech in October, May recognises that her primary objective of controlling immigration is incompatible with continued membership. Inside the single market, she noted, the UK would still have to accept free movement and the rulings of the European Court of Justice (ECJ). “It would to all intents and purposes mean not leaving the EU at all,” May surmised.

The Prime Minister also confirmed, as anticipated, that the UK would no longer remain a full member of the Customs Union. “We want to get out into the wider world, to trade and do business all around the globe,” May declared.

But she also recognises that a substantial proportion of this will continue to be with Europe (the destination for half of current UK exports). Her ambition, she declared, was “a new, comprehensive, bold and ambitious Free Trade Agreement”. May added that she wanted either “a completely new customs agreement” or associate membership of the Customs Union.

Though the Prime Minister has long ruled out free movement and the acceptance of ECJ jurisdiction, she has not pledged to end budget contributions. But in her speech she diminished this potential concession, warning that the days when the UK provided “vast” amounts were over.

Having signalled what she wanted to take from the EU, what did May have to give? She struck a notably more conciliatory tone, emphasising that it was “overwhelmingly and compellingly in Britain’s national interest that the EU should succeed”. The day after Donald Trump gleefully predicted the institution’s demise, her words were in marked contrast to those of the president-elect.

In an age of Isis and Russian revanchism, May also emphasised the UK’s “unique intelligence capabilities” which would help to keep “people in Europe safe from terrorism”. She added: “At a time when there is growing concern about European security, Britain’s servicemen and women, based in European countries including Estonia, Poland and Romania, will continue to do their duty. We are leaving the European Union, but we are not leaving Europe.”

The EU’s defining political objective is to ensure that others do not follow the UK out of the club. The rise of nationalists such as Marine Le Pen, Alternative für Deutschland and the Dutch Partij voor de Vrijheid (Party for Freedom) has made Europe less, rather than more, amenable to British demands. In this hazardous climate, the UK cannot be seen to enjoy a cost-free Brexit.

May’s wager is that the price will not be excessive. She warned that a “punitive deal that punishes Britain” would be “an act of calamitous self-harm”. But as Greece can testify, economic self-interest does not always trump politics.

Unlike David Cameron, however, who merely stated that he “ruled nothing out” during his EU renegotiation, May signalled that she was prepared to walk away. “No deal for Britain is better than a bad deal for Britain,” she declared. Such an outcome would prove economically calamitous for the UK, forcing it to accept punitively high tariffs. But in this face-off, May’s gamble is that Brussels will blink first.

George Eaton is political editor of the New Statesman.